C HAPTER 3: A NGEL T RANSACTIONS : I N S EARCH O F T HE I DEAL S TRUCTURE
3. Critical Success Factors
Factors critical to success include: • The company has progressed beyond the start-up phase. • A strong management team with public company and sector experience. • Long-term strategy to grow as a public company (i.e., management recognizes that this is just one step in growing a business.) • The company has a reasonable valuation, which in turn results in a viable share structure. • Long-term investor support. • The presence of advisors (lawyer, broker, investment banker) experienced in public venture capital. • Management recognizes and accepts the responsibilities of being a public company, including the additional costs, disclosure requirements and the limited liquidity inherent in small-cap stocks. WHY ANGELS SHOULD CARE The CPC is simply a mechanism to grow a company. Accordingly, an investor still requires a good deal to be successful. The CPC is not for every company, but in the right instance, it is an excellent growth vehicle, as it allows the company to multi-tier finance and create a structure similar to an IPO with a strong investor base. It may also enable investors to attract money they would not have access to as a private company. It is also important not to emphasize short-term liquidity, but to concentrate on building a company. The key is to create a like-minded approach with the other angel investors, the broker, counsel, management and the board of directors, focused on creating share holder value. Having a core group of long-term angel investors will definitely give the CPC an advantage.
Here is a summary of some of the “pros” and “cons” of a Capital Pool Company:
PROS: • It allows the entrepreneur and seed investors to leverage private dollars with public dollars. • Angels are able to maintain greater control of the company for longer term, especially in structuring and financing. • Angels face fewer operational restrictions than working with VCs. • The CPC does not have the complexities of VC term sheets and structures. • It allows participants to partner with “patient capital” from institutions. • It provides access to capital, especially for businesses not considered by VCs. • It creates a recognized market valuation for the company. • The public shares can be used as currency for M&A activity. • The shares can be used to attract talented management. • The company can create stock option and share purchase programs as an incentive for employees. • Can raise up to $2 million, a significant amount for growth capital.
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